RBI’s focus on inflation is timely

Given that growth is robust even as inflation is trending upwards and beyond the RBI target, raising the repo rate in a bid to dampen overall demand in the economy and prevent inflation becoming more broad-based is timely.

3 min readOct 8, 2026 06:00 AM IST First published on: Oct 8, 2026 at 06:00 AM IST

On Wednesday, with the Monetary Policy Committee of the Reserve Bank of India raising the repo rate by 25 basis points, it moved up from 5.25 per cent to 5.5 per cent. A higher repo rate is expected to make borrowing more costly for everyone and thus acts as a drag on economic activity. The decision to make the first hike of the repo rate since February 2023 was not only unanimous — all six members of the MPC voted in favour — but also widely expected. The less obvious but perhaps more consequential change was the shift in the RBI’s stance from “neutral” to “calibrated tightening”. The last time the RBI assumed this stance was exactly eight years ago.

The RBI’s primary mandate, as Governor Sanjay Malhotra has underlined, is to ensure price stability while keeping in view economic growth. Since the last policy review in August, the situation has changed on both these counts, necessitating a change in policy. On economic growth, the Indian economy has surprised everyone by showing resilience despite a worsening global context. The 7.8 per cent growth in Gross Domestic Product during the first quarter (April, May, June) surprised on the upside when the data was released at the end of August. This has led the RBI to bump up the full-year (2026-27) forecast from 6.7 per cent, as pencilled in the August policy, to 7.1 per cent now. But notwithstanding the domestic growth momentum, the situation has become considerably more challenging from the point of view of inflation, thanks to the “sudden re-escalation of the West Asia conflict in September and the consequent hardening and volatility in global crude prices”. Making the domestic inflation outlook worse are the deficient Southwest monsoon and El Niño conditions. Retail inflation has been going up steadily through the year, breaching the 4 per cent RBI target level. In fact, the RBI now expects it to touch 6 per cent by the end of December with full-year inflation around 5.2 per cent.

Given that growth is robust even as inflation is trending upwards and beyond the RBI target, raising the repo rate in a bid to dampen overall demand in the economy and prevent inflation becoming more broad-based is timely. What is even more welcome is the shift in the RBI’s stance. It suggests that the RBI is squarely focussed on dealing with a possible spike in inflation. Simply put, interest rate cuts are off the table for the time being, and the RBI has signalled the start of a rate hike cycle, given that globally other central banks are expected to raise interest rates in the coming months.